Hong Kong has long been recognised as the gateway between China and the global economy due to its strategic geographic location and business-friendly policies.
In the funds arena, however, the Cayman Islands has historically been the dominant choice of fund domicile for asset managers seeking to invest into Hong Kong and China and from Hong Kong and China into the rest of the world.
When an asset manager is evaluating a fund domicile, it will evaluate Hong Kong in the same way it would any of Hong Kong’s competitor fund domiciles and will consider the range of fund structures available, the tax, legal and regulatory environment, its investors requirements and the strength and experience of local service providers.
The Hong Kong funds landscape has however evolved considerably in recent years with the emergence of new onshore structures (see below) available to managers based in Hong Kong as part of the Hong Kong government’s determined efforts in the recent years to reinforce the city’s standing as a premier asset management hub.
This briefing focuses on the private funds arena. However, China has also gradually opened up its broader financial market to greater foreign participation and continuously encourages two-way flow of capital through the development of a number of schemes allowing access to capital markets, trading and certain financial products. Notable schemes include the QFII regime and the Connect Programmes.
Aligning the fund domicile with the manager’s economic substance
As the legal, regulatory and tax environments globally have evolved in recent years, we have seen a renewed focus by governments on clamping down on structuring which seeks to artificially route profits to low tax jurisdictions where companies traditionally had very little economic substance. As the offshore jurisdictions have steadily implemented economic substance requirements in the face of global pressure, we have seen asset managers in Hong Kong choose to align the domicile of their fund structure with where they have the bulk of their economic substance, typically Hong Kong. The benefits include:
- one regulatory regime - operating under a single regulatory framework simplifies compliance requirements and reporting, thereby eliminating the complexities of navigating multiple regulatory environments;
- one tax system - remaining within a unified tax system avoids the complications of cross-border tax implications, streamlining tax planning and filing;
- one time zone - operating in the same time zone facilitates seamless communication and coordination between the fund and manager, better alignment of business hours, thereby improving overall operational efficiency; and
- significant cost savings - avoiding the need for multiple service providers, thereby resulting in significant cost savings.
Onshore Hong Kong fund structures
In the private funds arena in Hong Kong, the emergence of the Hong Kong limited partnership fund (“LPF”) and the open-ended fund company (“OFC”) structures have been game changers for the industry.
LPF
The LPF regime was introduced in 2020. Given that the LPF legislation was closely modelled on the legislation governing Cayman Islands exempted limited partnerships, it quickly gained traction with private equity and venture capital managers. As of May 2024, the total number of LPFs in Hong Kong was 825.
These structures are well placed as vehicles to raise funds from Hong Kong and Chinese investors to invest globally or for overseas investors to invest in China and Asia due to their versatility and Hong Kong’s very business friendly environment. The LPF legislation also has not imposed any investment restrictions and LPFs are free to invest in real asset classes (real estate, debt, private equity and venture capital).
OFC
The OFC regime was first introduced in 2018 and despite its name, can also be closed-ended. After having undergone a series of revisions and enhancements over the years, the OFC has grown to become a fund structure which can very much hold its own against the segregated portfolio company, its counterpart in the Cayman Islands. The OFC continues to gain popularity, especially with hedge fund managers, as evidenced by the recent surge in number of OFCs being incorporated in recent years. As at 31 March 2024, total number of registered OFC was 302.
